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Succession Planning Part 3 – Understanding the Family Business

The family business is a vital force in the economy. More than 60 percent of all businesses are family owned or controlled. They range in size from the traditional small business to a third of the Fortune 500 firms. It is estimated that family businesses generate about half of the country’s Gross National Product and half of the total wages paid. Understanding the Family Business is critical if it is to prosper.

Our economy depends heavily on the continuity and success of the family business. It is unfortunate, even alarming, that such a vital force has such a poor survival rate. Less than one third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership.

At any given time, 40 percent of businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.

The following is a list of options to consider:

q· Close the doors.

q· Sell to an outsider or employee.

q· Retain ownership but hire outside management.

q· Retain family ownership and management control.

To be one of the few family businesses that survive transfer of ownership requires a good understanding of your business and your family.

There are four basic reasons why family firms fail to transfer the business from generation to generation successfully:

Lack of viability of the business.

Lack of planning.

Little desire on the owner’s part to transfer the firm.

Reluctance of offspring to join the firm.

These factors, alone or in combination, make transferring a family business difficult, if not impossible. The primary cause for failure, however, is the lack of planning. With the right plans in place, the business, in most cases, will remain healthy.

There are four plans that make up the transition process. By implementing these plans, you will virtually ensure the successful transfer of your business within the family hierarchy.

– A strategic business plan for the business will allow you an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company’s future.

– The family strategic plan is needed to maintain a healthy, viable business. This plan establishes policies for the family’s role in the business. For example, it may include an entry and exit policy that outlines the criteria for working in the business. It should include the creed or mission statement that spells out your family’s values and basic policies for the business. The family strategic plan will address other issues that are important to your family. By implementing this plan, you may avoid later conflicts about compensation, sibling rivalry, ownership and management control.

– A succession plan will ease the founding or current generation’s concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready. Many founders do not want to let go of the company because they are afraid the successors are not prepared, or they are afraid to be without a job. Often, heirs sense this reluctance and plan an alternative career. If, however, the heirs see a plan in place that outlines the succession process, they may be more apt to continue in the family business.

– An estate plan is critical for the family and the business. Without it, you will pay higher estate taxes than necessary. Taking the time to develop an estate plan ensures that your estate goes primarily to your heirs rather than to taxes.

For business owners who do little planning, the idea of preparing four plans may seem overwhelming. Although it is not easy, the commitment made by all family members during the planning process is the key ingredient for business continuity and success.